HOUSTON BUSINESS REVIEW

TUTORIAL ON SELLING YOUR BUSINESS: “Sale Structure – Stock Sale” Pros and Cons
By Ralph Fain

Ralph Fain is a principal in the brokerage firm, R/Fain Group. Mr. Fain also has over 20 years of broad business experience with Fortune 500 companies. R/ Fain Group is a professional business brokerage firm which confidentially represents the interests of various sellers and buyers. Each week Mr. Fain will give tips on Business Brokering, and how to sell your business.

In our last article we reviewed the selling a business via an “asset” sale. Today’s article deals with selling a business in an entirely different way – via a “stock” sale. It goes without saying that in order to have a “stock” sale, there must exist “stock” and shareholders (i.e., some type of corporate structure); you cannot have a “stock” sale with a business organized as a sole proprietorship.

A stock sale is the sale of the ownership shares/rights (the “stock”) of the corporation. The shares of the corporation are sold and all assets owned by the corporation, all liabilities owed by the corporation, etc are still retained by the corporation – only a change in ownership has occurred. The corporation remains just as it was prior to the sale but now it has a new owner(s). Just as with an “asset” sale, there are plusses and minuses to selling a company via a “stock” sale and, as with our last article, we will assume the role of seller in the discussion below.

From a seller’s perspective, the primary advantages of a stock sale are

- Sale of stock is taxed at a lower rate (capital gains rate)

- With a “C” corporation, double taxation is eliminated – taxation occurs only at the shareholder level

- All liabilities can be transferred to the buyer – and not retained by the seller

- Seller has the opportunity to structure sale in order to increase after tax income to seller

- Seller has some latitude regarding the allocation of the sales price – to the sale of stock vs to a covenant not to compete and/or to a consulting agreement

- Transaction is generally less complex than as asset sale

- May avoid lender releases and may avoid loan restrictions imposed on sale of assets in loan agreements


From a seller’s point of view, the primary disadvantages of a stock sale are

- Requires approval of shareholders (all if 100% sale)

- Seller cannot pick and choose assets to be retained

- Ownership of no-transferable rights or assets (e.g., patents, copyrights, etc) is lost

- Due diligence by buyer is more comprehensive due to assumption of liabilities – known and unknown

- Sales price is generally lower due to no buyer “step up” basis in assets, assumption of liabilities (especially unknown liabilities), and due to favorable tax treatment to seller (capital gains treatment resulting in greater after tax proceeds to seller)


Having a basic understanding of the pros and cons of a stock sale (from a seller’s perspective) will enable the seller to be better prepared during the entire sales process with the buyer. Better yet, working with a professional broker who possesses this and other pertinent and valuable knowledge will save you, the business owner, much time and money. As always, see you next time in this same space for our next article – the pros and cons of buying a business via an “asset” sale. As always, should you have any questions or require additional information please feel free to contact the R/ Fain Group at 832-646-0832 or via our web site.